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Why The Government Blocked The Airline Merger

Originally published on Sun August 18, 2013 4:07 pm

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RACHEL MARTIN, HOST:

This is WEEKEND EDITION from NPR News. I'm Rachel Martin.

Last week, the Justice Department put the breaks on a deal that could create the world's largest airline. The government has blocked a proposed merger between American Airlines and US Airways with a lawsuit. The action elicited some surprise because the airline industry has had a major run of mergers in recent years.

For more on the move and what it might mean for consumers winding down their summer travel season, Scott McCartney is with us. He is travel editor for The Wall Street Journal and he writes the Middle Seat column. He joined us from Dallas. Welcome to the program.

SCOTT MCCARTNEY: Good to be with you, Rachel.

MARTIN: So, Scott, were you surprised by the lawsuit brought by the Justice Department?

MCCARTNEY: Yeah, I think everyone was surprised. I think the companies were surprised. I think Wall Street was surprised. And frequent flyers were surprised. People were banking on this merger happening and already making preparations for it even in their frequent flyer accounts.

MARTIN: They were banking on it because so many high-profile mergers had come before?

MCCARTNEY: Yeah, I think so. The government clearly had favored big mergers before. The thinking with this one was we have two giant airlines; a third giant airline to compete with them makes sense. You know, given the history of the industry, and the fact that the government hadn't opposed a merger since the year 2000, it made sense that this would go through.

MARTIN: And so, is this just bad timing for these airlines? For American Airlines and US Airways, if they had proposed this a few years ago would this have gone through, no problem?

MCCARTNEY: Well, yeah. In mergers when industries consolidate, there's always been an advantage to the first mover. And as the industry itself gets more condensed, then it does become harder to argue that you're not going to hurt competition by consolidating further.

MARTIN: So what now? Is the deal dead or is there any possibility that this could be resurrected in some way?

MCCARTNEY: Well, I think there are good possibilities that this could be resurrected. The two companies have said they will fight the lawsuit; go before a judge, present their case. They think there are a lot of flaws in the lawsuit and they argue a lot of good consumer benefits for putting these two airlines together, and just convince the government that there is enough competition out there that this deal will go through.

MARTIN: What about the other scenario? If the deal doesn't go through, what happens to these two airlines?

MCCARTNEY: It's really hard to imagine in the sense that they have gone so far already to conclude the merger. They have already named management teams. They've already told executives - mostly in American - that they're not going to have jobs. There are US Airways executives who have already been house hunting in Dallas and looking at schools and everything else. So to separate the two companies and send them on their way is really tough.

US Airways is in a tough market position. They're doing very well now but they're not big enough to compete globally, and that is a disadvantage. And American is going to be, you know, Chrysler to General Motors and Ford, if you will. Significantly smaller than Delta and United. And a competitive disadvantage. American has already lost a lot of ground in a market like New York where corporate contracts are the real big deal in that marketplace. And so they're losing out on deals.

MARTIN: And lastly, as we wrap up the summer traveling season, is there any relief in sight when we talk about these really high fares and baggage fees? Is that something we just have to get use to?

MCCARTNEY: You know, we have had a couple decades in this country of a struggling airline industry that's essentially been subsidized by creditors in bankruptcy court. And it's only been recently that consumers have really paid the full fare of the cost of providing travel. Airlines are making money now. It's not a very high margin business still. If you want a healthy, profitable airline industry that can buy new planes and provide good service, I think that's the price we're going to have to pay.

MARTIN: Scott McCartney is the travel editor and Middle Seat columnist for The Wall Street Journal. Scott, thanks so much.